The simple answer to ‘can I charge interest on late payments’ is yes, you can. But only after a set amount of time and only a certain percentage of interest.

You’re not alone if you find yourself with unpaid invoices. Since COVID-19 hit, late invoice payments in the UK have risen by 23%. As a result, companies must consider more effective ways to ensure they’re paid on time to thrive post-pandemic and so that they maintain good cash flow.

So how do you handle late paying customers? This article will be a guide on how to charge interest on late payments by looking at the following areas:

  • When a payment is considered late
  • How to deal with late payments
  • How to calculate interest on a late payment
  • How to issue new invoices for late payments

When a payment is considered late

In the UK, the customer has 30 days to pay an invoice. The 30 days starts from the date you issue the invoice or the day you provide products or services to the customer (if this is later). If your business has agreed to longer payment terms for a customer, you should include the term details on the invoice. Then you can only consider the invoice late after that period has passed.

How to deal with late payments

First, check your invoice and that all the information on it is correct. Double-check the following information:

  • Invoice date
  • Total amount
  • Customer details (name, trading name, address)
  • Your payment information/bank details
  • Payment terms

Once you’re confident that the customer has all the information they need to make a payment, follow up with them to remind them about the outstanding invoice. Try to get them on the phone in the first instance, and use email if you can’t. Using a polite tone, ask if there is any more information you can provide so they can make payment easily. If you supply other businesses, make sure that your invoice is with the correct person in the customer organisation, or else there could be delays.

There may be a perfectly reasonable explanation why the payment is late, and it’s essential to be considerate and friendly, so you don’t damage any relationships you’ve built with your customers. So find out if there’s anything you can help the customer with, and agree on a date they should pay by. 

When you are following up, keep a record of all communications you send and receive. This proof will support your case if you need to resort to legal means. For example, send an email after you do a follow-up phone call, summarising what was said and asking for confirmation of receipt.

How to calculate interest on a late payment

After 30 days have passed since the invoice was issued, you are legally allowed to start charging interest. So again, chase up the customer and ask if there’s a reason they have not paid yet. Now is the time to let them know via call/email that you will be charging interest on the invoice amount now that it is overdue. 

You can start charging what is known as ‘statutory interest‘, which is 8% plus the Bank of England base rate.

So let’s say your unpaid invoice is £500. You’d first check what the Bank of England base rate is at that time. Say the base rate is 0.5%, you’d be charging 8.5% interest on the £500 payment. 

So first, calculate the annual statutory interest you can charge. This calculation would be:

£500 multiplied by 8.5%

500 x 0.085 = 42.5

So the annual interest you’d be allowed to charge is £42.50. Now divide that by 365 (for each day of the year), so you can figure out how much you’d be charging for interest daily.

£42.50 ÷ 365 = 0.11

Now you’d total up the number of days the invoice has been overdue. So say it’s one month after the initial 30-day deadline. You could charge 31 days worth of interest, so that would be:

£0.11 x 31 = £3.41

You would then issue a new invoice with the added interest on the total value the customer must repay.

How to issue new invoices for late payments

If the customer is not responding to your emails or calls, you could send them a new invoice with the added interest each week. Updating the invoice weekly means you can continue adding seven days worth of interest. Then, each week, add a new line on the invoice to show what this extra charge is.

Keep trying to contact the customer and agree on the way to pay the invoice. For example, they may tell you that they cannot pay right now, but they can pay in three months. This way, you could issue them with a final invoice with 90 days worth of interest added. Then follow up with them close to the new agreed date to make sure they will pay.

If you’re using software to manage your invoices, you can easily update an invoice or create a new invoice and nullify the out of date one. Use the Small Business Commission calculator if you are struggling to keep up with interest that is adding up.

As patient as you’ve been, sometimes the last resort is legal action. Consult a solicitor if the invoice is a sizable amount, and a legal professional should be able to help you submit a formal letter of claim to make your customer pay you back.

Create, customise and send invoices easily with a simple app

Now that you understand what you can and can’t do about unpaid invoices, you could streamline the rest of your payment process. With the Countingup business current account and app, you can create invoices in seconds, get notifications when you’re paid, and receive automatic invoice matching so that you can save yourself hours of bookkeeping admin.  

The app automates a lot of the time consuming manual tasks associated with running a business. For example, it can help you create invoices in seconds, reconcile invoices once paid, automatically categorise your expenses and total up a tax estimate, so you’ll always know how much you owe HMRC.

Countingup is saving business owners hours of time-consuming work and helping thousands keep on top of their finances. Find out more here to save yourself hours of accounting and financial admin, and get back to what you do best – running your business.

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